The Netherlands 2020 tax budget – summary

Introduction

On September 17, 2019 – the Dutch government presented its 2020 Budget, including its 2020 Tax Plan (“Belastingplan 2020”). Below we summarise some of the key proposals of the 2020 Tax Plan that should affect international businesses, being (i) newly announced corporation tax rates, (ii) certain tougher anti-abuse provisions and (iii) the new withholding tax on interest and royalties (2021). In addition, we highlight two other recent proposals of law that are relevant for the tax position of such businesses, the implementation laws for EU directives DAC 6 and ATAD 2.

Amended corporation tax rates

Last year, the Government announced a reduction in the Dutch corporation tax rates (to 16.5 per cent-22.55 per cent in 2020 and ultimately 15 per cent-20.5 per cent by 2021). As part of the current 2020 Tax Plan, however, the reduction in the top rate will be reversed for 2020. For 2021, the reduction of the top rate will be limited to 21.7 per cent (instead of a further reduction to 20.5 per cent). The rate reductions for the lower bracket (application to profits up to € 200,000) will remain intact.

The new corporation tax rate structure will be as follows:

Tightening of anti-abuse provisions: 1 – substance requirements

The State Secretary for Finance had already announced that the Dutch anti-abuse provisions in corporation tax and dividend tax will be amended in the wake of several European Court of Justice (CJEU) judgments¹  of February this year. This particularly concerns the conditions to be met by intermediate holding companies with a so-called linking function (schakelfunctie) to show that there are valid business reasons that reflect economic reality.

Although the Government takes the view that in essence the current anti-abuse rules and related substance requirements are in line with the CJEU’s rulings, it currently proposes a further amendment in the function of the substance requirements. These requirements will no longer serve as a safe harbour. Even if the substance requirements are met the Tax Authorities may still seek to counter situations they consider abusive. The proposed changes will affect the function of the substance requirements in the corporation tax, dividend tax and the proposed conditional withholding tax on interest and royalties.

Practically speaking, this change means that the Dutch Tax Authorities could try and challenge for instance the withholding tax exemption that currently applies to dividend distributions by a Dutch intermediate holding company to shareholders in EU Member States and tax treaty countries by proving that this structure is abusive, even if the relevant substance requirements are satisfied.

Tightening of anti-abuse provisions: 2 – permanent establishments

The existence of a permanent establishment is one of the principal touch points for taxing non-residents. In order to counter abusive situations, it is now proposed to align the domestic interpretation of the permanent establishment (and permanent representative) definition for personal income tax, wage tax and corporation tax with the permanent establishment definition of the relevant tax treaty (including MLI amendments). For non-treaty situations it is proposed to align the definition with the most recent version of the OECD Model Treaty (2017).

As the OECD definition is generally somewhat broader than the current Dutch permanent establishment interpretation, the proposed changes will likely result in more activities of foreign enterprises resulting in taxable presences in the Netherlands through a permanent establishment or permanent representative.

Conditional withholding tax on interest and royalties (as of 2021)

As already announced in the 2019 Tax Plan, the Government is proposing the introduction of a withholding tax of 20.7 per cent (equal to the top corporation tax rate in 2021) on interest and royalty payments to group entities based in EU blacklisted non-cooperative or low-taxing jurisdictions as of January 1, 2021.

The proposal is not formally part of the Tax Plan 2020 but has been published simultaneously and is part of the effort of the Dutch Government to prevent not only tax evasion but also tax avoidance. The proposal seeks to strike a balance between countering tax avoidance in abusive situations and the investment climate by not unnecessarily hindering fund flows.

Payments to related parties

The conditional withholding tax will only apply in related party situations. For this purpose a related party is an entity receiving a payment that has a “qualifying interest” the entity paying the interest or royalty or vice versa. Qualifying interest means direct or indirect influence on the operational activities of another entity. This will generally be the case if an entity has a controlling interest of more than 50 per cent of the voting rights. An entity with a qualifying interest in both the paying and the receiving entity also qualifies as a related entity. In addition a “cooperating group” of entities as defined in European Court of Justice case law²  could also qualify as holding a qualifying interest.

Low-taxed or EU blacklisted non-cooperative jurisdictions

In line with the recently introduced CFC legislation, low-taxed is defined as a jurisdiction with a statutory corporate income tax rate of less than 9 per cent which rate applies on October 1 of the year preceding the relevant taxation period (for the Dutch withholding tax). A list of low-taxed countries will be published annually by the Dutch Ministry of Finance. Non-cooperative jurisdictions are those jurisdictions qualified as such by the EU.

Interest and royalties

Interest will be interpreted broadly and include all remuneration received under a loan. A loan will also include similar funding arrangements such as financial lease or hire-purchase arrangements. Royalties have the same meaning as in the OECD Model Tax Treaty. Loans or licences extended on non-at arm’s length terms will first need to be adjusted to their arm’s length terms prior to applying the conditional withholding tax.

Direct and indirect payments

The proposal primarily aims to target direct payments of interest or royalties, meaning payments by either Dutch resident entities or by Dutch permanent establishments of non-Dutch entities.

In addition there may be scenarios where, although the direct payment is not made to a low-taxed jurisdiction, indirectly the payment has such a similar effect that it justifies being subject to the conditional withholding tax.

One example is the situation where a non-low-taxed intermediate conduit company has been artificially interposed between the recipient in the low taxed jurisdiction and the Dutch paying entity and such interposition can qualify as being “abusive”. This will be the case if the conduit is interposed with the main purpose or one of the main purposes of preventing the conditional withholding tax in the Netherlands and the conduit company is not the beneficial owner of the payments received. Other examples include payments to (reverse) hybrid entities and a direct payment to a high taxed jurisdiction in which payment is allocated to a permanent establishment of such an entity in a low-taxed jurisdiction.

Tax treaty protection

To the extent a country is a low-taxed jurisdiction but is also a tax treaty country the tax treaty currently prevails (and as such it may prevent the levy of this withholding tax). In order for the proposal to be effective, such tax treaties will need to be renegotiated. It is now proposed that in these situations there will be three year grandfathering period during which the Netherlands will not seek to enforce the withholding tax in order to enable time for treaty negotiations.

Other pending proposals - EU Directive implementations

Even though the following items are officially not part of the 2020 Tax Plan, we wanted to highlight two other recent proposals of law that are relevant for the tax position of such businesses, being the implantation laws for EU directives DAC 6 and ATAD 2.

• DAC 6: This Directive imposes mandatory reporting of cross-border arrangements affecting at least one EU Member State that fall within one of a number of “hallmarks”: broad categories setting out particular characteristics identified as potentially indicative of aggressive tax planning. The reporting obligations fall on “intermediaries” or, in some circumstances, the taxpayer itself. The information reported will be contributed to a central directory accessible by the competent authorities of the Member States.
• ATAD 2:This Directive aims to prevent hybrid mismatches. Hybrid mismatches are situations in which a tax benefit is achieved by make use of the differences between corporation tax systems; more particularly by making use of differences in the tax treatment (qualification) of bodies, instruments or permanent establishments. The differences between corporate tax systems can cause a situation that (i) a reimbursement or payment is deductible, but the corresponding proceeds are not taxed anywhere, or (ii) that the same compensation or payment is deductible several times.

The Dutch Government has recently published its proposals to implement both Directives – the implementation law for DAC 6 on July 12, 2019 and the implementation law for ATAD 2 on July 2, 2019. Both proposals still need to be discussed in the Dutch Parliament and the Dutch Senate.

Our comments

• The tax landscape is in flux, as a result of various international developments, including but not limited to the OECD’s BEPS Project, the European ATAD projects and the recent US tax reform. These three developments are triggers for international businesses to reconsider their current tax structures and implement changes.
• The current Dutch Government has made it clear that while on the one hand it is keen on attracting new international businesses to the Netherlands, it also wants to comply with EU state aid rules and Code of Conduct and the internationally agreed provisions countering aggressive tax planning. The current 2020 Tax Plan is another example of its intentions.
• International businesses need to carefully monitor the current proposals in order to avoid tax leakage. The Norton Rose Fulbright tax team will keep you up to date on the key developments going forward as, if adopted, they will have a major impact on groups.